Abstract
The capital structure of a company is a particular combination of debt, equity and other sources of finance that it uses to fund its long-term asset. The key division in capital structure is between debt and equity. The proportion of debt funding is measured by gearing or leverages. There are different factors that affect a firm's capital structure, and a firm should attempt to determine what its optimal, or best, mix of financing. But determining the exact optimal capital structure is not a science, so after analyzing a number of factors, a firm establishes a target capital structure which it believes is optimal. Capital structure policy also involves a trade-off between risk and return. Using more debt raises the risks in the firm's earnings stream, but a higher proportion of debt generally leads to a higher expected rate of return and the higher risk associated with greater debt tends to lower the stock's price. At the same time, however, the higher expected rate of return makes the stock more attractive to investors, which, in turn, ultimately increases the stock's price. Therefore, the optimal capital structure is the one that strikes a balance between risk and return to achieve our ultimate goal of maximizing the stock prices.
Jasir Ilyas,. (2008) The Determinants of Capital Structure: Analysis of Non Financial Firms Listed in Karachi Stock Exchange in Pakistan, Journal of Managerial Sciences, Volume 2, Issue 2.
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